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Can an insurer refuse to pay out for non-disclosure?

Unpacking the recent controversy over Momentum’s refusal to pay a claim due to non-disclosure.

Insurance group Momentum came under fire recently after it rejected a claim when a Durban man was shot and killed. The insurer rejected paying out R2.4 million because it said Nathan Ganas had not disclosed his high blood sugar levels.

What is interesting about this case is that just over a year ago, Old Mutual faced the same public outcry when it refused to pay out the death benefit of a policy-holder, who had also been murdered, due to the fact that he had not disclosed that he was diabetic.

Both companies were swayed by public opinion to pay out the cover. Initially Momentum stuck to its guns and only repaid the premiums it received for the cover. In a press statement it said “once we have evidence that a client has not acted in good faith, we rectify the matter in an objective manner, and in the interest of fairness to all our clients. If we do not do so, we indirectly encourage the practice of non-disclosure. This will in turn result in a worsening of claims experience which would ultimately increase the premiums for all our clients.”

Change of policy

However, in a further development, Momentum then decided to change its policy on payouts to take consideration of the violence of the death by creating a solution “that will pay an amount equal to the death benefit (limited to a maximum of R3 million) in the case of violent crime, regardless of previous medical history. This will apply to all existing as well as future life cover clients.”

The guarantee applies immediately to all life cover clients, and will be applied retrospectively. Momentum said they were identifying clients who were impacted in this way and will contact their families, including Mrs Ganas, to arrange payment.

Although Momentum has made the decision to make the payment as the death occurred from violent crime, it highlights the fact that legally an insurer does not have to pay out if a policy-holder failed to disclose all information.

What happens when the non-disclosure is discovered

What normally happens in the case where non-disclosure is discovered, the insurer will reconstruct the underwriting decision to see if the claim is still valid.

The cause of the claim need not be related to the pre-existing condition. For example, if someone does not disclose their heart condition and then claims for cancer treatment, the insurer has the right to reconstruct the policy as a whole.

This means they will consider all the information as though it had been provided upfront and how that would have affected the premium or policy.

It may be that the non-disclosure would have made no difference to the premium or cover, in which case the claim could be paid out in full. If the risk factor, that was not disclosed, would have resulted in a higher premium, then the decision on the amount to be paid would be based on how much cover the lower premium would have bought, had the insurer known about the condition.

In a case where the condition is so severe that cover would have been declined, the claim would not be paid (irrespective of the cause) as the contract would not have existed.

Deliberately misleading the insurer

According to Momentum, Mr Ganas had privately tested his blood sugar level multiple times before taking out cover, the most recent test being two weeks before taking out the cover. All tests had shown elevated blood sugar, which they argue means he deliberately misled them on his forms. According to Momentum based on these blood sugar levels they would have declined his cover which is why they were initially unwilling to make the payment.

It is difficult to prove whether Momentum would have issued the cover, even with a higher risk-rated premium, and it is unusual not to request basic glucose and cholesterol tests when providing cover. Yet, it does send a strong message that if you deliberately lie on your application, you won’t get the cover when you need it most.

Three things to know about non-disclosure

The most common areas of non-disclosure are related to medical conditions, occupation and financial standing.

Take time to think about the questions in the application form and provide all the relevant information.

Check your policy documents once they have been issued because these have a summary of the disclosures. Go back to your adviser or insurer if there are errors or omissions.

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